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# m3 s2 - PRINCIPLES OF MICROECONOMICS Midterm Test#3...

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PRINCIPLES OF MICROECONOMICS Midterm Test #3, Sample #2 Answers Time Allowed : 1 Hour This total marks in this test are 50. The test is divided into two parts: Part I - problem format - is worth 40 marks (40 of the total mark of 50) Part II - multiple choice- is worth 10 marks (10 of the total mark of 50) (5 multiple choice questions worth 2 marks each) SHOW YOUR WORK WHERE APPLICABLE . YOU MUST USE A PEN; PENCIL IS NOT ELIGIBLE FOR REMARKING Print your name and student number clearly on the front of the exam and on any loose pages. Name: _______________________________________ (Family Name) (Given Name) Student # : ______________________ There are 7 pages to the exam. - 1/6 -

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Principles of Microeconomics. Midterm Test #3, Sample #2 Answers Part I Place your answers (and work where necessary) in the space provided. Clearly label all axes, curves, and points. 1. Derivation of Demand (10 marks) In the space below, draw a diagram to demonstrate the derivation of two points of a relatively inelastic demand curve (not perfectly inelastic) for a good X from indifference curve and budget line analysis given a decrease in the price of X. The subsections below help you through this exercise. Clearly label your diagram. a) Draw a diagram of a budget line reflecting the initial prices of X (Pxo) and Y (Py) and the individual's income. Label your axes and intercepts (3 marks) b) Show the quantity of X (Xo) at initial consumer equilibrium. (2 marks) c) Draw a budget line representing a decrease in the price of X to Px 1 . (1 marks) d) Indicate the quantity of X 1 at consumer equilibrium for the new budget line. (1 mark) e) Draw an inelastic demand diagram reflecting the information from your indifference curve and budget line diagram. (3 marks) Qy (All other goods) Qx Inc/P Xo Inc/P X1 Inc/Py P Q P Xo P X1 Xo X 1 Xo X 1 D a) 1 mark: correct axes for Qx/Qy diagram: Qy (all other goods) and Qx 1 mark: intercepts of original budget line: Inc/Py and Inc/Pxo (or something similar) 1 mark: linear budget line b) 1 mark: Convex indifference curve (no positive slope) 1 mark: Xo at tangency of indifference curve and budget line c) 1 mark: outward rotation of budget line around fixed y-intercept d) 1 mark: X1 (or whatever designation) from tangency of new budget line and an indifference curve that does not intersect other indifference curve e) 1 mark: Xo from indifference curve diagram and Pxo for a point on demand 1 mark: X 1 from indifference curve diagram and P X1 < P Xo for second demand point 1 mark: X 1 % increase relative to Xo less than P X1 % decrease relative to P Xo (basically an attempt at a noticeably steep D) - 2/6 -
Principles of Microeconomics. Midterm Test #3,

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m3 s2 - PRINCIPLES OF MICROECONOMICS Midterm Test#3...

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